UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-04389

APPLERA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		06-1534213
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
301 Merritt 7, Norwalk, Connecticut (Address of Principal Executive Offices)		06851-1070 (Zip Code)

(203) 840-2000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No þ

As of the close of business on February 5, 2007, there were 183,551,517 shares of Applera Corporation-Applied Biosystems Group Common Stock and 78,547,743 shares of Applera Corporation-Celera Group Common Stock outstanding.

 

 

APPLERA CORPORATION
INDEX

				Page
Part I. Financial Information
Item 1.		Financial Statements – (unaudited)
		Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2006 and 2005			1
		Condensed Consolidated Statements of Financial Position at December 31, 2006 and June 30, 2006			2
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2006 and 2005			3
		Notes to Unaudited Condensed Consolidated Financial Statements			4-26
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Discussion of Applera Corporation			27-38
		Discussion of Applied Biosystems Group			39-44
		Discussion of Celera Group			45-47
		Market Risks			48
		Outlook			48-50
		Forward-Looking Statements and Risk Factors			50-65
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			66
Item 4.		Controls and Procedures			66
Part II. Other Information
Item 1.		Legal Proceedings			67
Item 1A.		Risk Factors			67-70
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			71
Item 4.		Submission of Matters to a Vote of Security Holders			72
Item 6.		Exhibits			73
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

APPLERA CORPORATION

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Products		$	442,846			$	403,109			$	833,928			$	741,638
Services			60,782				55,189				118,922				107,456
Other			38,221				31,389				74,408				62,821
Total Net Revenues			541,849				489,687				1,027,258				911,915
Products			209,802				194,869				406,461				363,076
Services			26,539				24,582				51,137				48,571
Other			3,055				3,425				5,882				7,059
Total Cost of Sales			239,396				222,876				463,480				418,706
Gross Margin			302,453				266,811				563,778				493,209
Selling, general and administrative			154,842				144,619				297,227				276,484
Research, development and engineering			62,160				73,077				120,062				142,774
Amortization of purchased intangible assets			2,842				680				5,579				1,719
Employee-related charges, asset impairments and other			2,513				360				6,013				1,231
Asset dispositions and legal settlements			(10,145	)			3,032				(1,058	)			26,541
Acquired research and development											114,251
Operating Income			90,241				45,043				21,704				44,460
Gain on investments, net											209				4,503
Interest expense			193				(78	)			(304	)			(165	)
Interest income			10,152				9,233				19,862				18,990
Other income (expense), net			1,039				1,001				2,456				2,708
Income before Income Taxes			101,625				55,199				43,927				70,496
Provision for income taxes			27,136				41,114				35,450				31,232
Net Income		$	74,489			$	14,085			$	8,477			$	39,264
Applied Biosystems Group (see Note 4)
Net Income per Share
Basic		$	0.41			$	0.17			$	0.09			$	0.38
Diluted		$	0.39			$	0.17			$	0.08			$	0.38
Dividends Declared per Share		$	0.0425			$	0.0425			$	0.0850			$	0.0850
Celera Group (see Note 4)
Net Loss per Share
Basic and diluted		$	(0.01	)		$	(0.23	)		$	(0.10	)		$	(0.46	)

See accompanying notes to the Applera Corporation unaudited condensed consolidated financial statements.

APPLERA CORPORATION

	At December 31,					At June 30,
	2006					2006
Assets
Current assets
Cash and cash equivalents		$	319,345			$	434,191
Short-term investments			591,265				509,252
Accounts receivable, net			389,336				382,509
Inventories, net			151,449				137,651
Prepaid expenses and other current assets			169,228				163,362
Total current assets			1,620,623				1,626,965
Property, plant and equipment, net			389,999				396,436
Goodwill and intangible assets, net			314,058				322,097
Other long-term assets			665,768				667,477
Total Assets		$	2,990,448			$	3,012,975
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	169,011			$	201,691
Accrued salaries and wages			72,229				98,938
Current deferred tax liability			17,045				17,560
Accrued taxes on income			36,314				50,944
Other accrued expenses			242,734				239,157
Total current liabilities			537,333				608,290
Other long-term liabilities			209,845				200,351
Total Liabilities			747,178				808,641
Stockholders’ Equity
Capital stock
Applera Corporation–Applied Biosystems Group			2,133				2,132
Applera Corporation–Celera Group			784				773
Capital in excess of par value			2,218,062				2,192,559
Retained earnings			717,379				714,137
Accumulated other comprehensive income			51,291				40,947
Treasury stock, at cost			(746,379	)			(746,214	)
Total Stockholders’ Equity			2,243,270				2,204,334
Total Liabilities and Stockholders’ Equity		$	2,990,448			$	3,012,975

See accompanying notes to the Applera Corporation unaudited condensed consolidated financial statements.

APPLERA CORPORATION

		Six months ended
		December 31,
		2006				2005
Operating Activities of Continuing Operations
Net income		$	8,477			$	39,264
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			42,646				46,048
Asset impairments			3,000				1,090
Employee-related charges and other			3,013				(1,409	)
Share-based compensation programs			8,895				4,437
Sale of assets and legal settlements, net			(209	)			22,938
Deferred income taxes			709				(6,327	)
Acquired research and development			114,251
Changes in operating assets and liabilities:
Accounts receivable			(2,538	)			31,394
Inventories			(11,033	)			(7,626	)
Prepaid expenses and other assets			(13,500	)			(2,408	)
Accounts payable and other liabilities			(45,144	)			(2,762	)
Net Cash Provided by Operating Activities of Continuing Operations			108,567				124,639
Investing Activities of Continuing Operations
Additions to property, plant and equipment, net			(28,451	)			(25,747	)
Proceeds from maturities of available-for-sale investments			130,745				75,983
Proceeds from sales of available-for-sale investments			277,608				227,145
Purchases of available-for-sale investments			(487,771	)			(250,100	)
Acquisitions and investments			(121,403	)			(1,235	)
Proceeds from the sale of assets, net			322				4,503
Net Cash Provided (Used) by Investing Activities of Continuing Operations			(228,950	)			30,549
Financing Activities
Dividends			(15,411	)			(8,253	)
Purchases of common stock for treasury			(59,856	)			(457,120	)
Proceeds from stock issued for stock plans and other			74,584				70,432
Net Cash Used by Financing Activities			(683	)			(394,941	)
Effect of Exchange Rate Changes on Cash			6,220				(8,668	)
Net Change in Cash and Cash Equivalents			(114,846	)			(248,421	)
Cash and Cash Equivalents Beginning of Period			434,191				779,401
Cash and Cash Equivalents End of Period		$	319,345			$	530,980

See accompanying notes to the Applera Corporation unaudited condensed consolidated financial statements.

APPLERA CORPORATION

Note 1 – Interim Condensed Consolidated Financial Statements

Basis of Presentation

We prepare our unaudited interim condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, or GAAP. In preparing these statements, we are required to use estimates and assumptions. While we believe we have considered all available information, actual results could affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The results for the interim periods are not necessarily indicative of trends or future financial results. When used in these notes, the terms “Applera,” “Company,” “we,” “us,” or “our” mean Applera Corporation and its subsidiaries.

Through December 31, 2005, we were comprised of three business segments: the Applied Biosystems group, the Celera group, and Celera Diagnostics, a 50/50 joint venture between the Applied Biosystems group and the Celera group. Effective December 1, 2006, we changed the name of our Celera Genomics group to Celera group to better reflect the Celera group’s focus and business strategy. Effective January 1, 2006, the Celera group acquired the Applied Biosystems group’s 50 percent interest in the Celera Diagnostics joint venture such that it now owns 100 percent of Celera Diagnostics. As a result of this restructuring and the manner by which our management now operates and assesses our businesses, Celera Diagnostics is no longer a separate segment within Applera and we have restated prior period consolidating financial information to reflect this change. See Note 15 to our consolidated financial statements included in our 2006 Annual Report to Stockholders for a detailed description of the Celera Diagnostic restructuring.

We consistently applied the accounting policies described in our 2006 Annual Report to Stockholders in preparing these unaudited interim financial statements. We made all adjustments that are necessary, in our opinion, for a fair statement of the results for the interim periods. These adjustments are of a normal recurring nature. We condensed or omitted from these interim financial statements several notes and other information included in our 2006 Annual Report to Stockholders. You should read these unaudited interim condensed consolidated financial statements in conjunction with our consolidated financial statements presented in our 2006 Annual Report to Stockholders. We have reclassified some prior year amounts in the condensed consolidated financial statements and notes for comparative purposes.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for our 2009 fiscal year beginning July 1, 2008, and interim periods within that fiscal year. We are currently evaluating the provisions of SFAS No. 157 and the resulting impact of adoption on our financial statements.

Also in September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur through comprehensive income. The recognition and disclosure provisions of SFAS No. 158 are effective for our fiscal year ending June 30, 2007. Since we measure plan assets and obligations on an annual basis, we can not estimate the impact of SFAS No. 158 in advance of our June 30, 2007 measurement date. The amount we will record in our statement of financial position related to this Statement depends on numerous future events and circumstances, such as the assumptions used to value our pension plan liabilities and determine future funding requirements

Also in September 2006, the Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 established an approach that requires quantification of financial statement errors based on the effects of an error on a company’s balance sheet and income statement and related disclosures. Historically, we have used the “rollover approach” for quantifying identified financial statement misstatements. This approach quantifies misstatements based on the amount of the error originating in the current year. We are required to apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for our fiscal year ended June 30, 2007.

APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued

We are currently evaluating the provisions of SAB 108 but do not expect the resulting impact of adoption to have a material impact on our financial statements.

Note 2 – Events Impacting Comparability

We are providing the following information on some actions taken by us or events that occurred in the periods indicated:

		Three months ended								Six months ended
Income/(charge)		December 31,								December 31,
(Dollar amounts in millions)		2006				2005				2006				2005
Severance and benefit costs		$	—			$	(1.5	)		$	—			$	(1.5	)
Asset impairments			(3.0	)							(3.0	)			(1.1	)
Other			(0.1	)							(3.6	)
Reduction of expected costs			0.6				1.2				0.6				1.4
Total employee-related charges, asset impairments and other		$	(2.5	)		$	(0.3	)		$	(6.0	)		$	(1.2	)
Other events impacting comparability:
Revenue from sale of small molecule program		$	2.5			$	—			$	2.5			$	—
Asset dispositions and legal settlements			10.2				(3.1	)			1.1				(26.6	)
Acquired research and development											(114.3	)
Investment gains															4.5
Tax items			1.0				(28.0	)			9.8				(14.5	)

Employee-Related Charges, Asset Impairments and Other

The following items have been recorded in the condensed consolidated statements of operations in employee-related charges, asset impairments and other, except as noted.

Applied Biosystems group

Fiscal 2006

In the second quarter of fiscal 2006, the Applied Biosystems group recorded pre-tax charges of $1.5 million for employee terminations related to the Applied Biosystems/MDS Sciex Instruments joint venture, a 50/50 joint venture between the Applied Biosystems group and MDS Inc. MDS recorded a restructuring charge for a reduction in workforce as part of its strategy to focus on the life sciences market. The $1.5 million represented the Applied Biosystems group’s share of the restructuring charge.

The Applied Biosystems group recorded pre-tax benefits of $1.2 million in the second quarter and $1.4 million in the first six months of fiscal 2006 for reductions in anticipated employee-related costs associated with severance and benefit charges recorded in fiscal 2005.

In the first quarter of fiscal 2006, the Applied Biosystems group recorded a $1.1 million pre-tax impairment charge to write-down the carrying amount of its San Jose, California facility to its estimated market value at that time less estimated selling costs. This charge was in addition to a charge recorded in fiscal 2005. In the fourth quarter of fiscal 2006, the Applied Biosystems group completed the sale and recognized a $0.9 million pre-tax favorable adjustment to the charges previously recorded based on the actual sales price.

Other fiscal 2007 cash payments

During the first six months of fiscal 2007, the Applied Biosystems group made cash payments of $0.8 million for severance and employee benefits and office closures related to charges recorded prior to fiscal 2006. The following table summarizes the remaining cash payments by event and the expected payment dates as of December 31, 2006.

APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued

(Dollar amounts in millions)	Remaining cash payments					Expected payment dates
Fiscal 2003 employee-related charge		$	0.3			Fiscal 2008
Fiscal 2005 employee-related charge			0.1			Fiscal 2007
Fiscal 2005 excess lease space and other charges			1.1			Fiscal 2007 – Fiscal 2011
		$	1.5

Celera group

Fiscal 2007

During the second quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $2.5 million, which was primarily comprised of a $3.0 million pre-tax charge for the write-down of the carrying amount of an owned facility that was impaired initially in fiscal 2006, partially offset by a pre-tax benefit of $0.6 million for a reduction in anticipated employee-related costs associated with severance and benefit charges recorded in the third and fourth quarters of fiscal 2006. Both of these items are discussed below.

During the first quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $3.5 million for its estimated share of a damage award in continuing litigation between Abbott Laboratories, our alliance partner, and Innogenetics N.V. In September 2006, a jury found that the sale of hepatitis C virus (“HCV”) genotyping analyte specific reagents (“ASRs”) products by Abbott willfully infringed a U.S. patent owned by Innogenetics and awarded Innogenetics $7.0 million in damages. In January 2007, the U.S. District Court for the Western District of Wisconsin ruled in favor of Innogenetics’ request for a permanent injunction, and as such, ordered Abbott to withdraw its products from the market. The Court also reversed the jury verdict of willful infringement and ruled that Abbott did not willfully infringe Innogenetics’ patent and denied Innogenetics’ request for enhanced damages and attorneys’ fees. Innogenetics did not name the Celera group as a party in this lawsuit, but the Celera group has an interest in these products and in the outcome of the litigation because the enjoined products are manufactured by the Celera group and sold through its alliance with Abbott. Also, as these products are part of its alliance with Abbott, the Celera group has agreed to share the cost of this litigation, including the damage award described above. Abbott has informed the Celera group that it will appeal the judgment as both Abbott and the Celera group believe that Innogenetics’ patent is invalid and that the alliance’s HCV genotyping ASRs do not infringe Innogenetics’ patent. Abbott has filed an emergency motion with the Court of Appeals for the Federal Circuit seeking a stay of the permanent injunction during the appeal process. Also, on January 19, 2007, Abbott obtained a temporary stay of the injunction from the Court pending the Court’s consideration of the emergency motion for a stay of the permanent injunction.

APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued

Fiscal 2006

During fiscal 2006, the Celera group recorded pre-tax charges related to its decision to exit its small molecule drug discovery and development programs and the integration of Celera Diagnostics into the Celera group. These charges consisted of the following components:

		Employee-								Excess				Other
		Related				Asset				Lease				Disposal
(Dollar amounts in millions)		Charges				Impairments				Space				Costs				Total
Third quarter		$	10.7			$	8.0			$	0.8			$	1.4			$	20.9
Fourth quarter			2.1				1.8				0.4				1.2				5.5
Total charges			12.8				9.8				1.2				2.6				26.4
Cash payments			7.9								0.2				2.4				10.5
Non-cash activity							9.3								0.2				9.5
Balance at June 30, 2006			4.9				0.5				1.0								6.4
Additional charge							3.0												3.0
Non-cash activity							3.0												3.0
Cash payments			4.1								0.7								4.8
Reduction of expected costs			0.6																0.6
Balance at December 31, 2006		$	0.2			$	0.5			$	0.3			$	—			$	1.0

The employee-related charges were severance costs primarily for staff reductions in small molecule drug discovery and development. All of the affected employees were notified and terminated by September 30, 2006. In the second quarter of fiscal 2007, the Celera group recorded a pre-tax benefit of $0.6 million for a reduction in anticipated employee-related costs associated with the severance and benefit charges recorded in the third and fourth quarters of fiscal 2006.

The asset impairment charges primarily related to a write-down of the carrying amount of an owned facility to its current estimated market value less estimated selling costs, as well as write-offs of leasehold improvements and equipment. This facility was reclassified into assets held for sale in fiscal 2006. In the second quarter of fiscal 2007, the Celera group recorded an additional $3.0 million pre-tax, non-cash charge to write-down the carrying amount of this facility.

Cash expenditures for these charges were funded by available cash. The remaining cash expenditures related to these charges are expected to be disbursed by December 31, 2007.

Other fiscal 2007 cash payments

During the first six months of fiscal 2007, the Celera group made net cash payments of approximately $0.8 million related to an excess facility lease space charge that was recorded prior to fiscal 2006. The remaining net cash expenditures of approximately $3.5 million related to this charge, which reflected an adjustment in the second quarter of fiscal 2007, are expected to be disbursed by fiscal 2011.

Other Events Impacting Comparability

Revenue from sale of small molecule program

In the second quarter of fiscal 2007, the Celera group recorded a pre-tax gain of $2.5 million in net revenues from the sale of a small molecule drug discovery and development program to Schering AG, which represented the remaining balance for this transaction. The Celera group recorded $2.5 million in the fourth quarter of fiscal 2006 when the agreement for the sale of the program was executed.

Asset dispositions and legal settlements

The following items have been recorded in the condensed consolidated statements of operations in asset dispositions and legal settlements.

APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued

Fiscal 2007

In the second quarter of fiscal 2007, the Applied Biosystems group recorded a $4.8 million pre-tax benefit related to the settlement of a patent infringement claim and a $3.0 million pre-tax benefit related to our collection from a third party of a portion of its liability relative to our settlement of a prior legal dispute. Additionally in the second quarter of fiscal 2007, the Celera group recorded a $2.4 million pre-tax benefit related to the settlement of a litigation matter associated with the former Online/Information Business, an information products and service business.

In the first quarter of fiscal 2007, the Applied Biosystems group recorded a $9.1 million pre-tax charge related to a settlement agreement entered into with another company which resolved outstanding legal disputes with that company.

Fiscal 2006

In the first quarter of fiscal 2006, we recorded a $23.5 million pre-tax charge related to a litigation matter and an award in an arbitration proceeding with Amersham Biosciences, now GE Healthcare. We recorded the pre-tax charge as follows: $22.8 million at the Applied Biosystems group and $0.7 million at the Celera group. The arbitrator awarded Amersham past damages based on an increase in royalty rates for some of its DNA sequencing enzymes and kits that contain those enzymes, plus interest, fees, and other costs. As a result of this decision, the Applied Biosystems group recorded a pre-tax charge of $20.4 million in the first quarter of fiscal 2006, $19.5 million of which was recorded in asset dispositions and legal settlements. In the second quarter of fiscal 2006, we recorded an additional pre-tax charge of $3.1 million at the Applied Biosystems group as a result of the final determination of interest related to the arbitration award. We paid all amounts related to the arbitration matter in January 2006.

Acquired research and development

In the first quarter of fiscal 2007, the Applied Biosystems group recorded a $114.3 million charge to write-off the value of acquired in-process research and development (“IPR&D”) in connection with the acquisition of Agencourt Personal Genomics, Inc. (“APG”). As of the acquisition date, the technological feasibility of the acquired project had not been established, and it was determined that the acquired project had no future alternative use. The determination of the amount attributed to acquired IPR&D took into consideration an independent appraisal performed by an outside consultant. See Note 3 for more information on this acquisition.

Investments

In the first quarter of fiscal 2006, the Celera group recorded a pre-tax gain of $4.5 million in the condensed consolidated statements of operations in gain on investments, net from the sale of a non-strategic minority equity investment.

Tax items

Fiscal 2007

In December 2006, the President of the U.S. signed the Tax Relief and Health Care Act of 2006, which extended the R&D tax credit from January 1, 2006 through December 31, 2007. The Celera group included the estimated benefit of the current year R&D tax credit in the second quarter of fiscal 2007 estimated annual effective tax rate. In addition, the Celera group recorded a tax benefit of $1.0 million in the second quarter of fiscal 2007 related to the R&D tax credit generated between January 1, 2006 to June 30, 2006. In the first quarter of fiscal 2007, the Applied Biosystems group recorded a tax benefit of $8.8 million related to a reduction in the valuation allowance for some German net operating loss carryforwards.

Fiscal 2006

In the first quarter of fiscal 2006, the Applied Biosystems group recorded a tax benefit of $13.5 million related to the resolution of transfer pricing matters in Japan. During the second quarter of fiscal 2006, the Applied Biosystems group recorded tax charges of $28.0 million related to repatriation of cash balances held outside the U.S.

Note 3 – Acquisition

In July 2006, we acquired APG for approximately $121 million in cash, including transaction costs. At the time of the purchase, APG was a privately-held developer of next-generation genetic analysis technology. APG’s proprietary technology was based on stepwise ligation, a novel and very high throughput approach to DNA analysis.

APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued

In accordance with SFAS No. 141, “Business Combinations,” we accounted for this transaction as a purchase of assets rather than a business combination since APG did not meet the definition of a business as defined by Emerging Issues Task Force (“EITF”) Abstracts Issue 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.” The key considerations impacting our accounting determination were that APG was primarily focused on research and development activities, had not commenced principal operations, and did not have products, customers or revenues. We allocated the purchase price as follows:

(Dollar amounts in millions)		Fair Value
Property, plant and equipment		$	1.4
Intangible asset – workforce			1.5
Acquired IPR&D			114.3
Deferred tax asset			4.7
Deferred tax liability			(0.5	)
Total purchase price		$	121.4

We allocated this transaction to the Applied Biosystems group. The estimated fair value attributed to the workforce was determined based on the estimated cost to recruit, hire, and train a workforce comparable to that in existence at APG at the time of our purchase of its assets. At the time of the acquisition, approximately 20 employees of APG became employees of the Applied Biosystems group. The recorded fair value of the workforce intangible asset is being amortized over its expected period of benefit of 3 years.

At the time of the acquisition, APG was in the process of prosecuting certain patents, but none had been issued. Any licenses APG had were not exclusive and did not provide it a measurable technological advantage. As a result, neither the patents or licenses were deemed to be identifiable assets and no value was assigned.

As of the acquisition date, the technological feasibility of the acquired IPR&D project had not been established, and it was determined that the project had no future alternative use. The amount attributed to acquired IPR&D took into consideration an independent appraisal performed by an outside consultant and was developed using an income approach. The project was valued using a discounted cash flow model and a discount rate of 30%. This discount rate was based on an estimated weighted average cost of capital given APG’s stage and development lifecycle. The projected cash flows from the project were based on an estimate of future revenues and expenses attributable to the project. The valuation assumptions were made solely for the purpose of calculating projected cash flows and valuing the intangible assets acquired at the date of acquisition. Additionally, the amount of purchase price which was in excess of the identifiable assets was allocated to IPR&D, as goodwill could not result from an acquisition of assets. Actual results may vary from the projected results.

The following table briefly describes the APG IPR&D project.

		At Acquisition Date
(Dollar amounts in millions)		Fair Value				Estimated Costs to Complete				Approximate Percentage Completed
Instruments		$	66.6			$	10.0			35%
Reagents			47.7				6.0			25%
Total		$	114.3			$	16.0

The instruments and reagents being developed are intended for very high throughput genetic analysis applications, including DNA sequencing and expression profiling. The initial instrument and reagents are expected to begin

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generating revenue in fiscal 2008. Enhanced platforms are expected to begin generating revenues in fiscal 2010 and fiscal 2013.

Note 4 – Earnings (Loss) per Share

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three months ended December 31:

		Applied Biosystems Group								Celera Group
(Dollar amounts in millions, except per share amounts)		2006				2005				2006				2005
Net income (loss)		$	74.8			$	30.9			$	(0.5	)		$	(17.3	)
Allocated intercompany sale of assets			(0.1	)
Allocated interperiod taxes			0.3				0.5
Total net income (loss) allocated			75.0				31.4				(0.5	)			(17.3	)
Less dividends declared on common stock			7.8				7.8
Undistributed earnings (loss)		$	67.2			$	23.6			$	(0.5	)		$	(17.3	)
Allocation of basic earnings (loss) per share
Basic distributed earnings per share(1)		$	0.04			$	0.04			$	—			$	—
Basic undistributed earnings (loss) per share			0.37				0.13				(0.01	)			(0.23	)
Total basic earnings (loss) per share		$	0.41			$	0.17			$	(0.01	)		$	(0.23	)
Allocation of diluted earnings (loss) per share
Diluted distributed earnings per share(1)		$	0.04			$	0.04			$	—			$	—
Diluted undistributed earnings (loss) per share			0.35				0.13				(0.01	)			(0.23	)
Total diluted earnings (loss) per share		$	0.39			$	0.17			$	(0.01	)		$	(0.23	)
Weighted average number of common shares
Basic			183.5				185.9				78.2				74.8
Common stock equivalents			7.9				4.3
Diluted			191.4				190.2				78.2				74.8

(1) Amounts represent actual dividends per share distributed.

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The following table presents a reconciliation of basic and diluted earnings (loss) per share for the six months ended December 31:

		Applied Biosystems Group								Celera Group
(Dollar amounts in millions, except per share amounts)		2006				2005				2006				2005
Net income (loss)		$	16.1			$	74.0			$	(7.5	)		$	(34.1	)
Allocated intercompany sale of assets			(0.2	)
Allocated interperiod taxes			0.1				(0.7	)
Total net income (loss) allocated			16.0				73.3				(7.5	)			(34.1	)
Less dividends declared on common stock			15.6				16.1
Undistributed earnings (loss)		$	0.4			$	57.2			$	(7.5	)		$	(34.1	)
Allocation of basic earnings (loss) per share
Basic distributed earnings per share(1)		$	0.09			$	0.09			$	—			$	—
Basic undistributed earnings (loss) per share							0.29				(0.10	)			(0.46	)
Total basic earnings (loss) per share		$	0.09			$	0.38			$	(0.10	)		$	(0.46	)
Allocation of diluted earnings (loss) per share
Diluted distributed earnings per share(1)		$	0.08			$	0.09			$	—			$	—
Diluted undistributed earnings (loss) per share							0.29				(0.10	)			(0.46	)
Total diluted earnings (loss) per share		$	0.08			$	0.38			$	(0.10	)		$	(0.46	)
Weighted average number of common shares
Basic			182.8				190.7				78.0				74.6
Common stock equivalents			7.5				3.5
Diluted			190.3				194.2				78.0				74.6

(1) Amounts represent actual dividends per share distributed.

Options to purchase shares at exercise prices greater than the average market prices were excluded from the computation of diluted earnings per share because the effect was antidilutive. Additionally, options to purchase shares of Applera Corporation-Celera Group Common Stock (“Applera-Celera stock”) were excluded from the computation of diluted loss per share because the effect was antidilutive. The following table presents the number of shares excluded from the diluted earnings and loss per share computations at December 31:

(Shares in millions)		2006				2005
Applera-Applied Biosystems stock			4.4				11.6
Applera-Celera stock			7.0				11.0

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Note 5 – Comprehensive Gain

The components of comprehensive gain (loss) are reflected net of tax, except for foreign currency translation adjustments, which are generally not adjusted for income taxes as they relate to indefinite investments in non–U.S. subsidiaries. Comprehensive gain was as follows:

		Three months ended								Six months ended
		December 31,								December 31,
(Dollar amounts in millions)		2006				2005				2006				2005
Net income		$	74.5			$	14.1			$	8.5			$	39.3
Other comprehensive gain (loss):
Net unrealized gains (losses) on investments			1.1				0.4				3.2				(0.1	)
Net unrealized gains on investments reclassified into earnings			(0.1	)							(0.3	)
Net unrealized gains (losses) on hedge contracts			(1.5	)			5.4				0.5				7.0
Net unrealized (gains) losses on hedge contracts reclassified into earnings			0.5				(3.1	)			0.5				(1.0	)
Foreign currency translation adjustments			3.9				(11.2	)			6.4				(14.5	)
Total other comprehensive gain (loss)			3.9				(8.5	)			10.3				(8.6	)
Total comprehensive gain		$	78.4			$	5.6			$	18.8			$	30.7

Note 6 – Inventories

Inventories included the following components:

		December 31,				June 30,
(Dollar amounts in millions)		2006				2006
Raw materials and supplies		$	57.3			$	44.3
Work-in-process			7.3				12.8
Finished products			86.8				80.6
Total inventories, net		$	151.4			$	137.7

Note 7 – Assets Held for Sale

In connection with the Celera group’s decision to exit its small molecule drug discovery and development programs during the third quarter of fiscal 2006, the Celera group decided to pursue the sale of its South San Francisco, California facility. See Note 8 to our consolidated financial statements included in our 2006 Annual Report to Stockholders. As a result of this decision, we reclassified $11.5 million of property, plant and equipment into assets held for sale in the third quarter of fiscal 2006 and recorded a $5.8 million pre-tax charge that represented the write-down of the carrying amount of this facility to its then current estimated market value less estimated selling costs. As discussed in Note 2, the Celera group recorded an additional $3.0 million pre-tax impairment charge for this facility during the second quarter of fiscal 2007. The sale of this facility is expected to occur by December 31, 2007.

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Note 8 – Goodwill and Intangible Assets

The carrying amounts of our intangible assets were as follows:

		December 31, 2006								June 30, 2006
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
(Dollar amounts in millions)		Amount				Amortization				Amount				Amortization
Amortized intangible assets
Acquired technology		$	83.5			$	51.3			$	83.3			$	44.5
Patents			29.9				24.1				29.9				22.9
Customer relationships			27.1				3.2				27.1				1.6
Other			1.8				0.4				0.3				0.3
Total amortized intangible assets		$	142.3			$	79.0			$	140.6			$	69.3
Unamortized intangible assets
Trade name			4.9								4.9
Total		$	147.2			$	79.0			$	145.5			$	69.3

Aggregate amortization expense was as follows:

		Three months ended								Six months ended
		December 31,								December 31,
(Dollar amounts in millions)		2006				2005				2006				2005
Applied Biosystems group		$	4.5			$	1.7			$	8.9			$	3.5
Celera group			0.6				1.0				1.2				2.2
Consolidated		$	5.1			$	2.7			$	10.1			$	5.7

We record amortization expense in cost of sales. However, amortization of acquisition-related intangible assets is recorded in the amortization of purchased intangible assets in the condensed consolidated statements of operations. At December 31, 2006, we estimated annual amortization expense of our intangible assets for each of the next five fiscal years as shown in the following table. Future acquisitions or impairment events could cause these amounts to change.

		Applied
		Biosystems				Celera
(Dollar amounts in millions)		Group				Group				Consolidated
Remainder of fiscal 2007		$	8.4			$	1.0			$	9.4
2008			14.4				0.6				15.0
2009			13.1				0.2				13.3
2010			10.4				0.2				10.6
2011			6.6				0.2				6.8

The carrying amount of goodwill at December 31, 2006 and June 30, 2006, was $245.9 million, of which $243.2 million was allocated to the Applied Biosystems group and $2.7 million was allocated to the Celera group.

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Note 9 – Supplemental Cash Flow Information

Significant non-cash financing activity for the six months ended December 31 was as follows:

(Dollar amounts in millions)		2006				2005
Dividends declared but not paid		$	7.8			$	7.9
Tax benefit related to employee stock options			14.0				5.1

Note 10 – Guarantees

Leases

We provide lease-financing options to our customers through third party financing companies. For some leases, the financing companies have recourse to us for any unpaid principal balance on default by the customer. The leases typically have terms of two to three years and are secured by the underlying instrument. In the event of default by a customer, we would repossess the underlying instrument. We record revenues from these transactions on the completion of installation and acceptance of products and maintain a reserve for estimated losses on all lease transactions with recourse provisions based on historical default rates and current economic conditions. At December 31, 2006, the financing companies’ outstanding balance of lease receivables with recourse to us was $6.3 million. We believe that we could recover the entire balance from the resale of the underlying instruments in the event of default by all customers.

Pension Benefits

As part of the divestiture of our Analytical Instruments business in fiscal 1999, the purchaser of the Analytical Instruments business is paying for the pension benefits for employees of a former German subsidiary. However, we guaranteed payment of these pension benefits should the purchaser fail to do so, as these payment obligations were not transferable to the buyer under German law. The guaranteed payment obligation, which approximated $58 million at December 31, 2006, is not expected to have a material adverse effect on our condensed consolidated statement of financial position.

Indemnifications

In the normal course of business, we enter into some agreements under which we indemnify third parties for intellectual property infringement claims or claims arising from breaches of representations or warranties. In addition, from time to time, we provide indemnity protection to third parties for claims relating to past performance arising from undisclosed liabilities, product liabilities, environmental obligations, representations and warranties, and other claims. In these agreements, the scope and amount of remedy, or the period in which claims can be made, may be limited. It is not possible to determine the maximum potential amount of future payments, if any, due under these indemnities due to the conditional nature of the obligations and the unique facts and circumstances involved in each agreement. Historically, payments made related to these indemnifications have not been material to our consolidated financial position.

Product Warranties

We accrue warranty costs for product sales at the time of shipment based on historical experience as well as anticipated product performance. Our product warranties extend over a specified period of time ranging up to two years from the date of sale depending on the product subject to warranty. The product warranty accrual covers parts and labor for repairs and replacements covered by our product warranties. We periodically review the adequacy of our warranty reserve, and adjust, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred.

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continued

The following table provides an analysis of the warranty reserve for the six months ended December 31:

(Dollar amounts in millions)		2006				2005
Balance beginning of period		$	10.6			$	14.0
Accruals for warranties			8.0				9.2
Usage of reserve			(8.2	)			(10.4	)
Balance at December 31		$	10.4			$	12.8

Note 11 – Pension and Other Postretirement Benefits

The components of net pension and postretirement benefit expenses for the three and six month periods ended December 31 were as follows:

		Three months ended								Six months ended
		December 31,								December 31,
(Dollar amounts in millions)		2006				2005				2006				2005
Pension
Service cost		$	0.8			$	0.7			$	1.8			$	1.3
Interest cost			10.9				8.9				21.8				18.0
Expected return on plan assets			(11.7	)			(9.6	)			(23.3	)			(19.1	)
Amortization of prior service cost			0.2				(0.1	)			0.4				(0.1	)
Amortization of losses			1.4				2.0				2.6				3.9
Net periodic expense		$	1.6			$	1.9			$	3.3			$	4.0
Postretirement Benefit
Service cost		$	—			$	0.1			$	0.1			$	0.1
Interest cost			0.9				0.8				1.8				1.6
Amortization of (gains) losses			(0.1	)							(0.2	)			0.1
Net periodic expense		$	0.8			$	0.9			$	1.7			$	1.8

We contributed approximately $1 million to our foreign and non-qualified domestic plans during the six months ended December 31, 2006, and expect to contribute an additional $1 million during the remainder of fiscal 2007. Based on the level of our contributions to the qualified U.S. pension plan during fiscal 2006 and previous years, combined with the performance of the assets invested in the plan, we do not expect to have to fund our qualified U.S. pension plan in fiscal 2007 in order to meet minimum statutory funding requirements. We made benefit payments of approximately $4 million under the postretirement plan during the six months ended December 31, 2006, and we expect to make approximately $3 million of additional benefit payments during the remainder of fiscal 2007.

Note 12 – Contingencies

Supply Arrangement

Delphi Medical Systems Texas Corporation (“Delphi Medical Systems”) is a supplier of some instruments, parts, and components to the Applied Biosystems group under a manufacturing and supply contract. On October 8, 2005, Delphi Medical Systems and its parent Delphi Corporation filed a petition in the United States Bankruptcy Court for the Southern District of New York seeking relief under the provisions of Chapter 11 of the federal Bankruptcy Code. As a result of the bankruptcy filing, the Applied Biosystems group had a pre-petition accounts receivable balance with Delphi Medical Systems of approximately $7 million. However, under a recoupment order entered by the Bankruptcy Court that became final on November 3, 2006, the Applied Biosystems group recouped this remaining pre-petition accounts receivable balance by offsetting against this balance amounts owed by the Applied Biosystems group to Delphi Medical Systems. Since the filing of the bankruptcy petition, Delphi has continued to supply instruments, parts, and components to the Applied Biosystems group under the contract, but it has informed the Applied Biosystems group that it does not intend to continue performing under the manufacturing and supply agreement after approximately May 2007. The Applied Biosystems group intends to use its own existing manufacturing facilities to replace the supply of some critical

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continued

items that it has been purchasing from Delphi Medical Systems and is evaluating the use of new suppliers for other critical items. In anticipation of the termination of supply from Delphi Medical Systems, the two companies recently entered into an amendment to the manufacturing and supply agreement that provides for larger than normal purchases of some products to increase inventory of critical items and the purchase of raw materials and tooling to help facilitate the transition of the manufacture of some products to the Applied Biosystems group.

Legal Proceedings

We are involved in various lawsuits, arbitrations, investigations, and other legal actions from time to time with both private parties and governmental entities. These legal actions currently involve, for example, commercial, intellectual property, antitrust, environmental, securities, and employment matters. The following is a description of some claims we are currently defending, including some counterclaims brought against us in response to claims filed by us against others. We believe that we have meritorious defenses against the claims currently asserted against us, including those described below, and intend to defend them vigorously.

The company and some of its officers are defendants in a lawsuit brought on behalf of purchasers of Applera-Celera stock in our follow-on public offering of Applera-Celera stock completed on March 6, 2000. In the offering, we sold an aggregate of approximately 4.4 million shares of Applera-Celera stock at a public offering price of $225 per share. The lawsuit, which was commenced with the filing of several complaints in April and May 2000, is pending in the U.S. District Court for the District of Connecticut, and an amended consolidated complaint was filed on August 21, 2001. The consolidated complaint generally alleges that the prospectus used in connection with the offering was inaccurate or misleading because it failed to adequately disclose the alleged opposition of the Human Genome Project and two of its supporters, the governments of the U.S. and the U.K., to providing patent protection to our genomic-based products. Although the Celera group has never sought, or intended to seek, a patent on the basic human genome sequence data, the complaint also alleges that we did not adequately disclose the risk that the Celera group would not be able to patent this data. The consolidated complaint seeks monetary damages, rescission, costs and expenses, and other relief as the court deems proper. On March 31, 2005, the court certified the case as a class action.

We filed a patent infringement action against Bio-Rad Laboratories, Inc., MJ Research, Inc., and Stratagene Corporation in the U.S. District Court for the District of Connecticut on November 9, 2004. The complaint alleges that the defendants infringe U.S. Patent No. 6,814,934. The complaint specifically alleges that the defendants’ activities involving instruments for real-time PCR detection result in infringement. We are seeking monetary damages, costs, expenses, injunctive relief, and other relief as the court deems proper. Bio-Rad and MJ Research answered the complaint and counterclaimed for declaratory relief that the ‘934 patent was invalid and not infringed, but we settled all of these claims with Bio-Rad and MJ Research in February 2006. Stratagene also answered the complaint and counterclaimed for declaratory relief that the ‘934 patent is invalid and not infringed. Stratagene is seeking dismissal of our complaint, a judgment that the ‘934 patent is invalid and not infringed, costs and expenses, and other relief as the court deems proper.

On-Line Technologies, Inc. (since acquired by MKS Instruments, Inc.) filed claims for patent infringement, trade secret misappropriation, fraud, breach of contract and unfair trade practices against PerkinElmer, Inc., Sick UPA, GmbH, and us in the U.S. District Court for the District of Connecticut on or about November 3, 1999. The complaint alleged that products called the Spectrum One and the MCS100E manufactured by former divisions of the Applied Biosystems group, which divisions were sold to the co-defendants in this case, were based on allegedly proprietary information belonging to On-Line Technologies and that the MCS100E infringed U.S. Patent No. 5,440,143. On-Line Technologies was seeking monetary damages, costs, expenses, injunctive relief, and other relief. On April 2, 2003, the U.S. District Court for the District of Connecticut granted our summary judgment motion and dismissed all claims brought by On-Line Technologies. On-Line Technologies filed an appeal with the U.S. Court of Appeals for the Federal Circuit seeking reinstatement of its claims, and on October 13, 2004, the Court of Appeals upheld dismissal of all claims except for the patent infringement claim, which was to be decided by the District Court in subsequent proceedings. However, the parties settled all of these claims under an agreement that was effective January 18, 2007, and the District Court formally dismissed the case on January 26, 2007.

Enzo Biochem, Inc., Enzo Life Sciences, Inc., and Yale University filed a patent infringement action against us in the U.S. District Court for the District of Connecticut on June 8, 2004. The complaint alleges that we are infringing six

16

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continued

patents. Four of these patents are assigned to Yale University and licensed exclusively to Enzo Biochem, i.e., U.S. Patent No. 4,476,928, entitled “Modified Nucleotides and Polynucleotides and Complexes Formed Therefrom,” U.S. Patent No. 5,449,767, entitled “Modified Nucleotides and Polynucleotides and Methods of Preparing Same,” U.S. Patent No. 5,328,824 entitled “Methods of Using Labeled Nucleotides,” and U.S. Patent No. 4,711,955, entitled “Modified Nucleotides and Polynucleotides and Methods of Preparing and Using Same.” The other two patents are assigned to Enzo Life Sciences, i.e., U.S. Patent No. 5,082,830 entitled “End Labeled Nucleotide Probe” and U.S. Patent No. 4,994,373 entitled “Methods and Structures Employing Compoundly – Labeled Polynucleotide Probes.” The allegedly infringing products include the Applied Biosystems group’s sequencing reagent kits, its TaqMan^® genotyping and gene expression assays, and the gene expression microarrays used with its Expression Array System. Enzo Biochem, Enzo Life Sciences, and Yale University are seeking monetary damages, costs, expenses, injunctive relief, and other relief as the court deems proper.

Molecular Diagnostics Laboratories filed a class action complaint against us and Hoffmann-La Roche, Inc. in the U.S. District Court for the District of Columbia on September 23, 2004, and filed an amended complaint on July 5, 2006. The amended complaint alleges anticompetitive conduct in connection with the sale of Taq DNA polymerase. The anticompetitive conduct is alleged to arise from the prosecution and enforcement of U.S. Patent No. 4,889,818. This patent is assigned to Hoffmann-La Roche, with whom we have a commercial relationship covering, among other things, this patent and the sale of Taq DNA polymerase. The complaint seeks monetary damages, costs, expenses, injunctive relief, and other relief as the court deems proper. On July 5, 2006, the court certified the case as a class action.

We are involved in several legal actions with Thermo Electron Corporation and its subsidiary Thermo Finnigan LLC. These legal actions commenced when we, together with MDS, Inc. and our Applied Biosystems/MDS Sciex Instruments joint venture with MDS, filed a patent infringement action against Thermo Electron in the U.S. District Court for the District of Delaware on September 3, 2004. The complaint alleges infringement by Thermo Electron of U.S. Patent No. 4,963,736, and seeks monetary damages, costs, expenses, and other relief as the court deems proper. Thermo Electron has answered the complaint and counterclaimed for declaratory relief that the ‘736 patent is invalid, not infringed, and unenforceable, and is seeking dismissal of our complaint, a judgment that the ‘736 patent is invalid, not infringed, and unenforceable, costs and expenses, and other relief as the court deems proper. After the filing of the action against Thermo Electron, on December 8, 2004, Thermo Finnigan filed a patent infringement action against us in the U.S. District Court for the District of Delaware. The complaint alleges that we have infringed U.S. Patent No. 5,385,654 as a result of, for example, our Applied Biosystems group’s commercialization of the ABI PRISM^® 3700 Genetic Analyzer. Thermo Finnigan is seeking monetary damages, costs, expenses, and other relief as the court deems proper. We have answered the complaint and counterclaimed for declaratory relief that the ‘654 patent is invalid, not infringed, and unenforceable, and are seeking dismissal of Thermo Finnigan’s complaint, a judgment that the ‘654 patent is invalid, not infringed, and unenforceable, costs and expenses, and other relief as the court deems proper. Thermo Finnigan subsequently filed a second patent infringement action against us, MDS, and the Applied Biosystems/MDS Sciex Instruments joint venture, in the U.S. District Court for the District of Delaware on February 23, 2005. The complaint alleges that we and the other defendants have infringed U.S. Patent No. 6,528,784 as a result of, for example, our commercialization of the API 5000™ LC/MS/MS system. Thermo Finnigan is seeking monetary damages, costs, expenses, and other relief as the court deems proper. We have answered the complaint and counterclaimed for declaratory relief that the ‘784 patent is invalid and not infringed, and are seeking dismissal of Thermo Finnigan’s complaint, a judgment that the ‘784 patent is invalid and not infringed, costs and expenses, and other relief as the court deems proper.

Other than for items deemed not material, we have not accrued for any potential losses in the legal proceedings described above because we believe that an adverse determination is not probable, and potential losses cannot be reasonably estimated, in any of these proceedings. However, the outcome of legal actions is inherently uncertain, and we cannot be sure that we will prevail in any of the proceedings described above or in our other legal actions. An adverse determination in some of our current legal actions, particularly the proceedings described above, could have a material adverse effect on us and our consolidated financial statements.

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continued

Note 13 – Segment and Consolidating Information

Presented below is our segment and consolidating financial information, including the allocation of expenses between our segments in accordance with our allocation policies, as well as other related party transactions, such as sales of products between segments. Our board of directors approves the method of allocating earnings to each class of common stock for purposes of calculating earnings per share. This determination is generally based on net income or loss amounts of the corresponding group calculated in accordance with GAAP, consistently applied.

As a result of the restructuring effective January 1, 2006 and the manner by which our management now operates and assesses our businesses, Celera Diagnostics is no longer a separate segment within Applera and we have restated prior period condensed consolidating financial information to reflect this change. See Note 16 to our consolidated financial statements included in our 2006 Annual Report to Stockholders for a detailed description of the segments and the management and allocation policies applicable to the attribution of assets, liabilities, revenues and expenses to the segments (which information is incorporated in this quarterly report by reference).

The following table summarizes revenues earned between segments:

		Three months ended								Six months ended
		December 31,								December 31,
(Dollar amounts in millions)		2006				2005				2006				2005
Applied Biosystems Group
Sales to the Celera group (a)		$	1.3			$	1.4			$	2.4			$	2.9
Celera Group
Royalties from the Applied Biosystems group (b)		$	—			$	1.1			$	—			$	2.0

(a)		The Applied Biosystems group recorded net revenues from leased instruments and sales of consumables and project materials to the Celera group.
(b)		The Celera group recorded net revenues primarily for royalties generated from sales by the Applied Biosystems group of products integrating the Celera Discovery System TM and some other genomic and biological information under a marketing and distribution agreement. The Celera group forgave future royalties related to this agreement as discussed in Note 15 to our consolidated financial statements included in our 2006 Annual Report to Stockholders.

Additionally, the Applied Biosystems group received, without reimbursement, $13.3 million in the first six months of fiscal 2007 and $19.1 million in the first six months of fiscal 2006 of tax benefits generated by the Celera group in accordance with our tax allocation policy.

In the following consolidating financial information, the “Eliminations” column represents the elimination of intersegment activity.

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continued

Condensed Consolidating Statement of Operations for the Three Months Ended December 31, 2006

		Applied
		Biosystems				Celera
(Dollar amounts in thousands)		Group				Group				Eliminations			Consolidated
Products		$	440,088			$	2,758			$	—			$	442,846
Services			60,782												60,782
Other			27,761				10,460								38,221
Net revenues from external customers			528,631				13,218				—				541,849
Intersegment revenues			1,349								(1,349	)
Total Net Revenues			529,980				13,218				(1,349	)			541,849
Products			205,905				4,397				(500	)			209,802
Services			26,622								(83	)			26,539
Other			2,956				99								3,055
Cost of Sales			235,483				4,496				(583	)			239,396
Gross Margin			294,497				8,722				(766	)			302,453
Selling, general and administrative			134,229				5,557				15,056				154,842
Corporate allocated expenses			13,295				1,768				(15,063	)
Research, development and engineering			50,876				11,935				(651	)			62,160
Amortization of purchased intangible assets			2,842												2,842
Employee-related charges, asset impairments and other							2,513								2,513
Asset dispositions and legal settlements			(7,788	)			(2,357	)							(10,145	)
Operating Income (Loss)			101,043				(10,694	)			(108	)			90,241
Interest income, net			3,391				6,954								10,345
Other income (expense), net			927				112								1,039
Income (Loss) before Income Taxes			105,361				(3,628	)			(108	)			101,625
Provision (benefit) for income taxes			30,579				(3,142	)			(301	)			27,136
Net Income (Loss)		$	74,782			$	(486	)		$	193			$	74,489

APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued

Condensed Consolidating Statement of Operations for the Six Months Ended December 31, 2006

		Applied
		Biosystems				Celera
(Dollar amounts in thousands)		Group				Group				Eliminations				Consolidated
Products		$	828,684			$	5,244			$	—			$	833,928
Services			118,922												118,922
Other			56,205				18,203								74,408
Net revenues from external customers			1,003,811				23,447				—				1,027,258
Intersegment revenues			2,442								(2,442	)
Total Net Revenues			1,006,253				23,447				(2,442	)			1,027,258
Products			399,281				8,041				(861	)			406,461
Services			51,291								(154	)			51,137
Other			5,626				256								5,882
Cost of Sales			456,198				8,297				(1,015	)			463,480
Gross Margin			550,055				15,150				(1,427	)			563,778
Selling, general and administrative			257,774				11,204				28,249				297,227
Corporate allocated expenses			24,900				3,362				(28,262	)
Research, development and engineering			95,991				25,156				(1,085	)			120,062
Amortization of purchased intangible assets			5,579												5,579
Employee-related charges, asset impairments, and other							6,013								6,013
Asset dispositions and legal settlements			1,299				(2,357	)							(1,058	)
Acquired research and development			114,251												114,251
Operating Income (Loss)			50,261				(28,228	)			(329	)			21,704
Gain on investments, net			209												209
Interest income, net			6,021				13,537								19,558
Other income (expense), net			2,241				215								2,456
Income (Loss) before Income Taxes			58,732				(14,476	)			(329	)			43,927
Provision (benefit) for income taxes			42,672				(6,939	)			(283	)			35,450
Net Income (Loss)		$	16,060			$	(7,537	)		$	(46	)		$	8,477

APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued

Condensed Consolidating Statement of Financial Position at December 31, 2006

		Applied
		Biosystems				Celera
(Dollar amounts in thousands)		Group				Group				Eliminations				Consolidated
Assets
Current assets
Cash and cash equivalents		$	296,514			$	22,831			$	—			$	319,345
Short-term investments			47,221				544,044								591,265
Accounts receivable, net			384,480				5,915				(1,059	)			389,336
Inventories, net			143,452				8,350				(353	)			151,449
Prepaid expenses and other current assets			139,056				32,259				(2,087	)			169,228
Total current assets			1,010,723				613,399				(3,499	)			1,620,623
Property, plant and equipment, net			381,868				8,368				(237	)			389,999
Goodwill and intangible assets, net			309,264				4,794								314,058
Other long-term assets			531,859				133,659				250				665,768
Total Assets		$	2,233,714			$	760,220			$	(3,486	)		$	2,990,448
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	167,982			$	3,639			$	(2,610	)		$	169,011
Accrued salaries and wages			66,791				5,438								72,229
Current deferred tax liability			17,045												17,045
Accrued taxes on income			21,789				14,525								36,314
Other accrued expenses			233,132				10,343				(741	)			242,734
Total current liabilities			506,739				33,945				(3,351	)			537,333
Other long-term liabilities			204,441				5,658				(254	)			209,845
Total Liabilities			711,180				39,603				(3,605	)			747,178
Total Stockholders’ Equity			1,522,534				720,617				119				2,243,270
Total Liabilities and Stockholders’ Equity		$	2,233,714			$	760,220			$	(3,486	)		$	2,990,448